OECD’s guidelines on value-added tax find widespread support

An important development in the VAT world occurred recently in the Japanese capital Tokyo, when 86 countries endorsed a new set of international guidelines, devised by the Organisation for Economic Co-operation and Development (OECD) committee on fiscal affairs, aimed at mitigating the risks of double taxation or unintended double non-taxation.

About 160 countries have adopted value added tax (VAT) systems over the years, and at the same time international trade in goods and services has expanded rapidly. This means greater interaction between VAT systems, and increased risks.

OECD deputy secretary-general Rintaro Tamaki said at the meeting of the OECD Global Forum on VAT in Tokyo that jurisdictions often used different VAT rules to determine which jurisdiction had the right to tax a cross-border transaction, or they interpreted similar rules differently. These differences had caused "severe obstacles" for international trade and investment and hinders economic growth, he said.

"Policy action to address this issue was urgently needed, and the OECD has therefore made it a key priority to develop consensus around internationally agreed principles for a coherent application of VAT to international trade."

South Africa is one of the 86 countries that endorsed the guidelines.

Tax authorities and the business community realised as far back as the late 1990s that VAT rules required greater coherence to avoid burdens on global trade. The OECD’s work started in 1998 with the Ottawa Conference on electronic commerce.

The 2014 OECD international VAT guidelines state that not only electronic commerce poses challenges, but that VAT could distort cross-border trade in services and intangible assets more generally, as they cannot be monitored at border posts in the same way as goods.

The OECD guidelines focus on the neutrality of VAT and the definition of the place of taxation for cross-border trade in services and intangibles between businesses. They accept the widespread consensus that the destination principle is the international norm: revenue accrues to the country of import where final consumption occurs.

The guidelines encourage similar levels of taxation where businesses in similar situations carry out similar transactions, that VAT rules be framed in such a way that they are not the primary influence on business decisions, and where specific administrative requirements for foreign businesses are considered necessary, they should not impose a disproportionate or inappropriate compliance burden on the businesses.

Tax authorities are encouraged to apply tax laws fairly, reliably and transparently; to encourage compliance by ensuring the costs of complying are kept to a minimum ; and to deliver quality information.

PwC VAT leader Charles de Wet, who attended the Tokyo meeting, says SA is already adhering to the guidelines to a large extent.

The problem is that not all its trading partners in Africa are doing the same.

Several African countries also attended the Tokyo conference, including Kenya, Zambia, Ghana and Mozambique. It is not clear whether all of them endorsed the guidelines.

Mr de Wet says all the positive elements expected in the design of a good VAT system have been encapsulated in the guidelines.

"VAT is supposed to work through the production cycle and it should be borne by the end consumer of the product or service and not by business." VAT is a major source of revenue for governments, which take a knock from under-taxation, but double taxation hurts trade.

"The boxes that need to be ticked include whether the system offers neutrality, certainty and efficiency," says Mr de Wet.

"It is an important development in the VAT world, and it is important for traders and tax authorities to take note of where VAT is being positioned in the tax value chain," says Mr de Wet.

South African Revenue Service spokesman Adrian Lackay says the guidelines offer revenue authorities greater certainty on how VAT should be imposed on cross-border services. Ignoring them could lead to "either double taxation or double nontaxation". He says South African legislation will have to be amended in the near future to comply fully with the OECD guidelines, as domestic legislation is not yet aligned with them in certain instances.

These amendments will be done under the guidance of the National Treasury.

"Fraudulent VAT activities and refund claims, in particular, pose significant risks to the fiscus. These risks have to be managed continuously to protect the fiscus against abuse and fraud," says Mr Lackay.

VAT collections in South Africa amounted to 26.4% of the government’s main sources of tax revenue in the 2012-13 fiscal year, compared with 24.7% in 2008-09. Total collections increased from R191bn in 2009-10 to R240bn in 2012-13.

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